Pricing Growth-Indexed Bonds
IMF Working Papers, November 1, 2005
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- Pricing Growth-Indexed Bonds
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Bibliographic details
- Authors: Paolo Mauro, Marcos Chamon
- Published: November 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451862355.001
Summary
- Authors: Paolo Mauro, Marcos Chamon
- Date: November 1, 2005
- Core proposition: Growth-indexed bonds can reduce the procyclicality of emerging-market countries' fiscal policies and lower the likelihood of costly debt crises.
- Main barrier noted: Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle.
- Objective of the paper: Present a simple way of pricing growth-indexed bonds and quantify the implications of increasing their share in total debt.
Pricing approach (as described)
- The article presents a simple method for pricing growth-indexed bonds intended to reduce investor concerns about valuation difficulties.
- Terminology preserved: growth-indexed bond, plain-vanilla bond.
Quantitative implications and findings
- Increasing the share of growth-indexed bonds in total debt is analyzed quantitatively to measure:
- The ensuing decline in the probability of default.
- The reduction in the spreads at which standard bonds can be issued.
- No numerical results for default probabilities or spread reductions are provided on this page; the page reports that the analysis tracks these quantitative implications.
Policy relevance and implications
- Growth-indexed bonds are presented as a tool to:
- Reduce fiscal procyclicality in emerging-market countries.
- Decrease the likelihood of costly sovereign debt crises.
- Addressing investor concerns about pricing simplicity could facilitate issuance and adoption.